Elevated Economic Uncertainty

by Brett Bauer, 1st Source Bank Chief Financial Officer
March 7, 2025

Uncertainty is a common word in today’s discussions when speaking about the economy. I hear this often in economic presentations, conversations with business leaders & finance professionals, and many others. We are all dealing with tariffs, immigration policies, geopolitical risks, global economic slowdown, questions around the financial health of the U.S. consumer, business impact, inflation expectations, volatility around interest rates, etc. Despite all these risks, the base economic growth forecast for this year is a mild slowdown, not a recession. The 4th quarter GDP reported a respectable 2.3% quarterly growth rate on an annualized basis. The projections from economists in the marketplace as reported by Blue Chip Financial Forecasts are showing the economy to slow down to a low of 1.9% throughout the year. There are many risks to these forecasts going lower, but the two main considerations I will focus on at the moment are potential trade war impacts and the financial health of the consumer.

Tariffs

Trade wars can be impactful on both a macro and micro perspective. The concerns being discussed are higher prices and a slower U.S. economy. However, are these notions warranted? Will these actually materialize from the trade policies being put in place? Fortunately, we have a relatively recent case study to get an idea of the potential repercussions.

The last time we saw tariffs in the headlines to this magnitude was in 2018 during the last Trump administration. Trump started in January 2018 with tariffs mainly targeted against China ranging from 20% to 50% on solar panels and washing machines. He then followed with 25% tariffs on steel and 10% on aluminum. Trump continued with a few more phases on broader categories throughout the year. China subsequently retaliated with their own tariffs, thus creating a trade war that escalated and eventually plateaued later in the year. These actions caused immediate pressure to specific industries which ultimately cascaded into the macro economy.

Some industries rely more heavily on international trading partners, and analyzing the 2018 tariff impact on these industries might give us some insight on the potential risks for today’s event. One industry in particular that experienced the effect was the washing machine industry, which was directly targeted in the initial round of tariffs. The impact was an immediate increase in prices as noted in the graph which shows the ‘major appliance’ category within the Consumer Price Index, a popular U.S inflation measure. Prices for this category went higher by roughly 15% throughout the year. This lasted for a long enough period that demand slowed and companies were impacted. Whirlpool’s CEO noted at the time, “the net impact of all remedies and tariffs has turned into a headwind for us.”

This dynamic bled into the macro economy as well. We saw both inflation and an eventual slowdown in the overall economy. Total inflation as measured by the Consumer Price Index moved higher from 2.15% in January 2018 to 2.85% in July 2018, an increase of 0.70 percentage points. The U.S economy as measured by the Gross Domestic Product slowed from 4.6% in the 4th quarter of 2017 down to 0.6% in the 4th quarter of 2018. Indeed, the current fears of higher inflation and a slowing economy are warranted.

US Consumer

With these fears appearing justified, how does that impact the U.S. consumer? Can the consumer continue spending against this potential backdrop of higher prices? These are important thoughts to keep in mind, especially considering that consumers account for roughly 70% of the U.S. economy. Any type of slowdown with the consumer could prove to be substantial.

Consumers have been spending since shortly after the pandemic fears subsided. They had excess cash from stimulus and savings; however, these sources of funds have since been exhausted and use of credit cards and other revolving lines of credit have increased to record highs. While the level of monthly debt payments from these types of consumer loans may seem alarming, comparing this against the consumers’ disposable income on a monthly basis shows that the households still maintain a manageable ability to fulfill their monthly debt payments. We are not back to pre-pandemic levels, but we are getting close.

While the consumer may still have some capacity to absorb some of the pressure from higher prices as a result of the trade war, there is not much of a cushion here. Any immediate disruption could test the consumer which could have a meaningful impact to our overall economy.

In summary, the U.S. economy was in good shape in the 4th quarter of 2024 with some momentum still in place from prior years. Economists are still projecting positive growth for this year, but the risks to these projections are growing everyday as the level of uncertainty increases. Trade wars from tariffs and other risks are likely to impact the consumer in the near term. Moreover, consumers appear to have a limited ability to endure further pressure. Timing will be important as we move forward. A resolution to the tariffs sooner than later will help alleviate much of the current uncertainty, which would definitely help with the future outlook on the economy.